Inheritance Tax Part 1

Question 1

How are IHT transfers valued?

Answer 1

As how much of a loss to the estate they generate.

As an example, two vases together are worth £50,000, but individually worth £5,000.

If Ben gifts one of these vases, the loss to his estate is £45,000 (£50,000 - £5,000), because his estate is worth £45,000 less.

The remaining vase, within his estate, is worth £5,000.

Question 2

What is meant by related property for IHT purposes?

Answer 2

Property owned by an individual can be related to that owned by a connected party, usually a spouse.

The rules are designed to avoid couples being able to split their ownership in an attempt to deliberately reduce the values for IHT purposes.

To avoid this being effective, HMRC can ‘aggregate’ all related property holdings. They effectively ignore the value of the ‘part’ and treat it as a proportion of the value of ‘all of the parts’.

As an example:

Ben owns 40% of the total shares of Bray Ltd. and Becky owns 30%. Ben’s shares as a minority shareholder are valued at £10,000. However, as when combined with Becky’s, their joint shareholding makes them majority shareholders.

For IHT purposes, say, their joint shares are valued at £35,000.

Ben’s shareholding would be valued at £20,000 4/7ths (40 shares / 70 shares)of the total £35,000 shareholding.

Question 3

When would a transfer between spouses not be exempt from IHT? and what are the limits?

Answer 3

When a spouse is not domiciled in the UK, then transfers are not unlimited.

Transfers are limited to the NRB of the domiciled spouse making the gift and the non-dom allowance, which is also £325,000.

Total transfers between spouse and non-dom amount to £650,000.

Question 4

What are the timeframes for a non-dom spouse electing to become dom and what does it mean?

Answer 4

Can elect to be domiciled in the UK within 2 years of spouse’s death, but this will mean she will suffer IHT on her worldwide assets in the future.

Question 5

What is the criteria for ‘normal out of income expenditure’ to apply?

Answer 5

Any amount can be given away provided that it:

1. is out of income
2. doesn’t affect the donor’s ability to maintain their usual standard of living.
3. is habitual or regular.

Remember 5% withdrawals from an investment bond represent capital not income.

Question 6

What is a potentially exempt transfer

Answer 6

PETs are transfers made by an individual to:

Another individual
A bare trust
A disabled trust

To identify a PET you do not need to concern yourself with amounts, you just need to consider the recipient of the transfer.

Question 7

What is an exempt transfer

Answer 7

completely ignored in the IHT calculation

Question 8

What needs to be considered when making CLTS and then the effect of CLTs on death of the donor?

Answer 8

At the time the gift is made, the cumulative value of gifts in the last 7 years needs to be established.

Any gift above the Nil rate band with be charged 20%.

If the donor dies, the values of the CLTs that were made within the last 7 years are re-assessed at death tax rates and, just like PETs, the tax bill could be tapered when a donor has survived for more than the 3 years.

For CLTs that had lifetime tax taken when they went into the trust, this amount can be offset against the tax bill for that gift on death. If the lifetime rate exceeds the tapered death tax due, there is unfortunately no refund of tax!

Question 9

If the donor of a gift into trust pays the lifetime IHT of 20%, why does it need to be grossed up?

Answer 9

Any IHT payment by the donor, however, will mean that the gift to the trust was not only the capital/asset/property/cash that was put into the trust: as the donor is also paying the tax, the donor has made a net gift into the trust, and in addition to the net amount, has paid the IHT. The gross transfer is therefore the net gift into the trust and the tax.

if £100,000 cash was gifted into the trust, and the trustees paid IHT of 20% on the CLT, the tax would simply be 20%, so £20,000.

If this 100k gift was made by the donor then the 100k would be net after the IHT lifetime tax of 20%.
100k/0.8 = 125k

20% of 125 = 25k CLT tax

Question 10

Consideration of transferring unused NRB to a spouse?

Answer 10

The percentage of the NRB that can be transferred is based on the prevailing NRB at the time of first death.

Once the transferable percentage has been ascertained, that percentage can then be multiplied by the prevailing NRB at the time of second death (i.e. £325,000 currently).

IT IS THE PERCENTAGE OF THE UNUSED NRB THAT IS BEING TRANSFERRED, NOT THE VALUE OF THE UNUSED NRB

The result is then added to the individual’s own NRB to arrive at the total applicable NRB.

Question 11

what are the timelines for claiming unused NRB?

Answer 11

The claim should be made within

2 years of the end of the month in which the death occurs; or
3 months of beginning to act as personal representatives (if that is later)

Question 12

How can unused NRB be transferred to unconnected parties?

Answer 12

Armelle marries Charles. Charles dies leaving his estate and NRB to Armelle.

Armelle marries Callum. Armelle dies leaving her £325,000 estate to her son. This is a non-exempt transfer and uses her full NRB.

Callum can claim Charles’ NRB as it has not been claimed or used. This means he has NRB of £650,000. He never met Charles.

Question 13

Limit to inheriting NRB?

Answer 13

No one person is entitled to more than double the NRB applying at their date of death. Max you can have is £650,000.

Question 14

Conditions for RNRB to be applicable to an estate?

Answer 14

individual dies on or after 6 April 2017
individual owns a home, or a share of one, so that it’s included in their estate
individual’s direct descendants such as children or grandchildren inherit the home, or a share of it
value of the estate isn’t significantly more than £2 million

Question 15

What are the considerations for downsizing with regards to the RNRB?

Answer 15

If a home is sold or downsized on or after July 8th 2015, the residence nil rate band that was available in the ‘large’ house will still be available, even if the current house is less than that amount, as long as assets of an equivalent value are passed to direct descendants.

Question 16

Tapering rules for RNRB?

Answer 16

The RNRB is reduced by £1 for every £2 that the value of the estate exceeds the threshold of £2,000,000.

This also applies to the transferring of the RNRB. If the first spouse had an estate over £2,000,000, the amount available to transfer can be reduced, even if it was completely unused on first death.

Question 17

What is meant by death bed planning?

Answer 17

Reducing their estate to the £2M threshold with some last-minute gifts, to enable their estate to benefit from the ‘residential nil rate band’ of £175,000 per person. If a person dies owning assets worth more than £2M currently, their inheritance tax free residential nil rate band will be tapered away or even reduced to nil. Subject to any capital gains tax consequences, the person could consider making a gift to reduce his or her estate to below £2M to retain the residential nil rate band. Although these gifts will not be effective for inheritance tax purposes if the person does not survive them by 7 years, they will successfully reduce the value of the estate sufficiently to make it eligible for the residential nil rate band, and possibly also that belonging to their late spouse.

Question 18

Explain the implications on the qualification for the RNRB if an individual created a trust in his Will

Answer 18

1. Trustees would have discretion over who ultimately receives the benefit, this means that the property is not being inherited by a direct descendant.
2. The RNRB could be lost.
3. However, if the property is appointed to the children absolutely,
4. Within 2 years of death,
5. The RNRB could be claimed.

Question 19

Effect of placing or paying a property within an estate into trust on the RNRB?

Answer 19

1. If a qualifying residential interest is placed into a discretionary will trust, it will not qualify for the RNRB, even if the beneficiaries are direct descendants.
2. However, if the trustees appoint the qualifying interest out to direct descendants, within two years, the RNRB could be potentially be claimed.
3. If the property is placed in a bare trust or an immediate post death interest trust, then it will qualify for the RNRB provided the beneficiaries are direct descendants.

Question 20

What is the Charity reduced rate of IHT?

Answer 20

36% if at least 10% of the net estate is left to charity.

Question 21

Calculate the net estate or baseline amount of an estate

Answer 21

Gross estate

less

Exempt transfer (excluding planned charity gift)

NRB

Reliefs (business property etc.)

Question 22

On what value is the charity reduced rate calculated on?

Answer 22

Net estate, so do not take of RNRB before assessing 10% value of gift.

RNRB cannot be used to reduce the estate for charity purposes.

Question 23

Timeline for quick succession relief to apply?

Answer 23

5 years from the date of the original death

Question 24

The calculation for the amount of reduction that is applied to the estate of the second person to die is:

Answer 24

(net transfer / gross transfer) x tax paid on first transfer x Relevant %

where:

The net transfer is the post-IHT estate that the second person receives
The gross transfer is the pre-IHT estate that the second person would have received if no IHT had been due
The relevant percentage depends on how long the recipient survived following the donor’s death:

Question 25

to work out IHT payable, how is QSR used?

Answer 25

QSR is taken off the IHT liability that would be due if QSR was not available

Question 26

What rates is business relief given at/

Answer 26

100% for unincorporated businesses and shareholdings in AIM quoted companies

50% for controlling shareholdings in listed companies and land/buildings/plant used in a company or partnership.

Question 27

Key point to consider with regards to business relief and RNRB?

Answer 27

Assets which qualify for 100% business relief have 0 IHT due on them.

However, they are still included in the accumulation of the estate and then relief of 100% of their worth is deducted later.

For the purpose of calculating the estate value for RNRB tapering, the value of the relevant business property IS included in the cumulation.

Question 28

What businesses are disregarded for business relief?

Answer 28

1. Businesses that aren’t traditional ‘trading companies’ and consist, wholly or mainly, of dealing in securities, stocks or shares, land or buildings, or making or holding investments.
2. If the business is subject to a binding contract of sale. This would include shares in a partnership that were subject to a ‘Buy and Sell’ agreement.
3. Disregarded assets include those not used in the business in the previous 2 years, or those not required for future use in the business at the time of the transfer.

Question 29

Conditions for agricultural relief to apply?

Answer 29

if you were to turn the farm upside down, which elements would stick – just the elements firmly routed to the ground, i.e., crops buildings and the land itself. These are the eligible items.

The property must have been:

occupied by the transferor for agricultural purposes for at least the previous 2 years
or
owned by the transferor for 7 years and occupied by someone else for agricultural purposes for that time

Question 30

Key consideration surrounding business/agricultural relief and spouses?

Answer 30

If the business were passed to a spouse, where there would be an exemption anyway due to spousal transfer then the business relief will have been essentially wasted - Think of Gray case study.

Question 31

What relief is given for a reduction in value of assets for IHT?

Answer 31

If the recipient still owns the property at the point of IHT assessment, the value for the tax calculation is the market value at the date of the donor’s death.

If the recipient has sold the property at arm’s length before the date of the donor’s death, the value for the tax calculation will be the market value at the date of sale

Question 32

What is the order of deductions when it comes to IHT exempt items, reliefs and charitable gifts?

Answer 32

1. Calculate gross estate - qualifying assets such as BR are accumulated within the estate but nil rated (think, £20k of AIM shares may mean they are tapered).
2. Deduct any debts or mortgages. At this stage check if the estate is tapered for RNRB.
3. Net estate - deduct BR and NRB to provide net estate. At this point check the 10% rule.
4. Remove remaining exemptions - RNRB and charitable gifts.

Question 33

Who pays IHT when:

Lifetime tax on a CLT?

Answer 33

Donor or trustees of receiving trust.

Question 34

Who pays IHT when:

Tax due on their lifetime gift following the death of the donor within 7 years.

Answer 34

Recipient of the PET

Question 35

Who pays IHT when:

Further tax following death

Answer 35

Either the trustees of the trust or the deceased’s personal representatives.

Question 36

Deadline for when tax should be paid for lifetime transfers

Answer 36

Tax is due 6 months after the end of the month of the transfer; except for:

• transfers made between 5th April and 1st October when the deadline is extended to 30th of October the following year.

Question 37

Deadline for when tax should be paid on death transfers

Answer 37

Tax is due 6 months after the end of the month of death

Question 38

List the options to mitigate IHT within Administrational changes

Answer 38

• Update wills to ensure use of NRB and RNRB as appropriate
• Charitable gifts
• Pension EOW
• ## Deed of variation

Question 39

List the options to mitigate IHT within gifting

Answer 39

• Use of annual gift exemptions
• Use of gifting out of income
• Use of PETs and CLTs

Question 40

List the options to mitigate IHT within estate planning investments

Answer 40

• DGTs
• Loan trusts
• BR qualifying investments

Question 41

List the options to mitigate IHT within Protecting IHT liabilities

Answer 41

• Gift inter vivos insurance within trust
• 7 year life assurance to protect loss of NRB due to CLTs
• WOL plan to pay IHT bill

Question 42

Explain the implications of divorce on a Will.

Answer 42

• On divorce, Chloe’s Will remains valid.
• However, as an ex-spouse will be treated as if they died on the date the marriage legally ended they will not be able to benefit from the Will
• unless there were express clauses that stated otherwise.
• The estate will be distributed via the rules of intestacy.
• The ex-spouse will not be able to be an executor, if named.

Question 43

Explain briefly the benefits of making a new Will.

Answer 43

• One can leave the estate to who one wishes/avoids intestacy rules
• Could make provision for minors/beneficiaries
• could specify when the beneficiaries receive their share/avoids minors benefitting at age 18.
• Can appoint a new executor
• and a legal guardian for minors until they reaches 18.